Michigan Court Becomes First in the Country to Rule Against Coverage for COVID-19 Business Losses
On July 1, 2020, a state court judge in Lansing, Michigan, issued what is believed to be the first judicial decision in the country on an issue at the heart of scores of lawsuits nationwide: Are business interruption losses due to coronavirus closure orders covered by insurance?
The decision was bad news for insureds. In an oral ruling, Judge Joyce Draganchuk of Michigan’s 30th Circuit Court held that the insured’s property policy, which provided business interruption coverage, did not cover business losses suffered by the plaintiff—the owner of restaurants in Lansing and in nearby Williamston. The plaintiff/insured sought coverage for damages totaling $650,000—losses allegedly caused by a state closure order that restricted patronage of his restaurants.
The plaintiff’s coverage arguments ran squarely into the two major obstacles insurers around the country have been emphasizing in denying coverage for such claims: the virus did not cause “property damage” to insured property and, even if it did, a “virus exclusion” in the policy precluded coverage.
It is estimated that at least half of the property insurance policies purchased over the past several years by businesses include business interruption coverage. That coverage is meant to reimburse policyholders for lost income due to the unanticipated interruption of their businesses. It is often referred to as a type of “time element” coverage because it covers losses incurred by the insured over a limited period of time, as defined in the policy. However, almost every property policy that offers this type of coverage requires that the loss of income be the result of physical damage to the insured’s property—or to property in the near vicinity of the insured’s property.
Since the pandemic began, insurers have insisted that Covid-19 does not damage property, rather it damages individuals who contract the disease. Policyholder lawyers, citing cases arising in other contexts, have countered that the mere loss of use of covered property constitutes physical damage to that property. The strength of this argument often turns on the precise definition of “property damage” in the policy. Some, but not all, policies define property damage not only as physical injury to property but also as the loss of use of that property. Pointing to that definition, plaintiffs cite cases where insureds successfully argued that their properties suffered a loss of use even though not structurally damaged, such as when the presence of toxic gas in a building temporarily prevents its occupancy.
Judge Draganchuk was not persuaded by the plaintiff’s loss-of-use argument. In her oral opinion, she stated: “There has to be something that physically alters the integrity of the property . . . There has to be some tangible, i.e., physical, damage to the property.” She suggested that even if the insured could show that the coronavirus had been physically present in the insured’s buildings, that would not be the type of physical injury required to trigger the policy. Responding to the insured’s argument that there was physical loss to the building because the government’s order effectively prohibited its occupancy, the Judge stated: “That argument is simply nonsense.”
The judge also pointed to the fact that the policy specifically excluded losses caused by viruses. This is the second hurdle many businesses have encountered in claiming coverage for Covid-19 –related losses. Most property policies now include such exclusions, which insurers began adding to policies in the wake of the SARS epidemic over 10 years ago. Even though that epidemic had little impact in the U.S., insurers were quick to react to the concerns expressed by health professionals that such epidemics could someday evolve into global pandemics. They rushed to add exclusions for losses caused by bacteria and viruses, or simply by “pandemics.” At the time, few policyholders were even aware of the addition of these standard exclusions to their policies.
Judge Draganchuk summarily rejected the plaintiff’s argument that the virus exclusion should be disregarded because it was ambiguously written.
Although Judge Draganchuk’s opinion, which is captioned Gavrilides Management Company et al. v. Michigan Insurance Company, applied Michigan law, it is likely to be cited by insurers nationwide in the slew of ongoing lawsuits in which policyholders are making very similar arguments.
Although Gavrilides is a discouraging development for Michigan policyholders, they should keep in mind that the court’s ruling was highly dependent on the exact wording of the applicable policy language. The definition of “property damage” in other policies may be worded differently, and we have seen some policies—particularly those issued by Lloyds of London—that that do not contain virus exclusions. Insureds who have suffered business interruption losses due to the coronavirus should check with their brokers or coverage counsel before giving up all hope of coverage. And out of an abundance of caution, insureds would be wise to file claims with their insurers even if the wording of their policies is similar to that of the insured in Gavrilides.